5 tax breaks that could change or go

There are only 15 days left for senators to defend the entire Tax Code.

Instead of squabbling over which tax breaks to kill to overhaul the tax system, Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel’s top Republican, Utah’s Orrin Hatch, are trying to flip the script with their “blank slate” approach. By eliminating virtually every special tax provision, they’re putting the burden on colleagues to explain to them — by July 26 — why each provision in the Tax Code ought to stay.

Text Size

-

+

reset

With hundreds of tax breaks jammed into the code, it’s clear that not every provision will survive an overhaul, and those that do may look dramatically different. That’s leaving everyone — lobbyists, executives and lawmakers — scrambling to game out how a new tax system might look.

Here’s a look at five tax breaks that are vulnerable to being dramatically rewritten — or scrapped entirely — and how advocates might fight to save them.

1. The mortgage interest deduction

What is it? The government allows homeowners to deduct up to $1 million each year in mortgage interest, including for vacation homes.

How much does it cost? It’s one of the biggest so-called tax expenditures, which makes it hard to ignore during tax reform when lawmakers are searching for money to pay for lowering rates. The Congressional Budget Office projects the break will cost more than $1 trillion over 10 years.

Lawmakers could also simply pare it back, focusing the write-off more on those further down the income scale. Capping the break at $500,000 and replacing the deduction with a credit would save $213 billion, according to the Tax Policy Center.

How will lobbyists protect it? Get ready for reminders that the U.S. is only now showing signs of emerging from a years-long housing crisis.

Curbing the break will only hurt housing prices, especially in vacation communities, said Jamie Gregory, deputy chief lobbyist of the National Association of Realtors.

“We finally have housing and the economy headed in the right direction, and we don’t think this is a good time to be messing around with it,” he said.

2. Carried interest

What is it? Hedge fund managers, private equity executives and others working on Wall Street pay a special tax rate on profits-based compensation known as carried interest. Instead of paying ordinary income taxes — which top out at almost 40 percent — carried interest is taxed as a capital gain, generally at a rate of 20 percent. Top earners started paying an additional 3.8 percent tax on their investment income, such as capital gains, this year.

How much does it cost? About $17 billion over 10 years.

What might happen? Democrats have long complained that the break is unfair and that Wall Street executives’ pay ought to be taxed as ordinary income. Amid the crush of tax reform, they might finally get their way if lawmakers decide it’s not worth spending much time worrying about the plight of hedge fund and private equity managers.

How will lobbyists protect it? The industry has repeatedly beaten back Democrats’ efforts to kill the break, saying higher rates would only hurt the economy. “Increasing taxes on carried interest would hurt all partnerships that strengthen thousands of companies across the country,” said Steve Judge, president of the Private Equity Growth Capital Council.